Households may have to pay up to £125 per year to cover the cost of “green”
home improvements for the poorest customers under Coalition plans, energy
companies have warned.

Industry sources said the cost of a new green scheme has been underestimated by up to £1.8 billion per year by Whitehall officials.

The new policy, called the Energy Company Obligation, will begin to hit households next year at a time when rising gas prices have already pushed the average bill above £1,335 annually.

Under the initiative, gas and electricity suppliers will be forced to offer poor households ways to save energy, such as insulation and more efficient boilers, which will be charged back to all households through bills.

Ministers claim this will cost bill-payers just £1.3 billion per year or about £50 per household – the same as under current schemes to help poor customers.

However, one major energy company told The Daily Telegraph that it is preparing for the cost of ECO to be up to £3.1 billion per year – or £125 per household.

Another senior energy boss agreed with this assessment, saying the Government “needs to switch its digits around” to from £1.3 billion to £3.1 billion.

The Government strongly disputes its scheme will be so expensive. Greg Barker, the climate change minister, said he “will certainly not allow customer bills to be impacted in that way”.

He added: "The Prime Minister showed this week with his determination to legislate to get people the lowest energy tariffs that we are the Government on the side of the consumer."

Mr Barker said energy companies will be forced to meet their obligations at the Government's price or hand over their responsibilities to third parties to deliver more cheaply.

“We believe our economic model is robust and [the companies] are not taking into account the dynamics of the market,” he told The Daily Telegraph.

Energy companies are currently lobbying the Government to put a £1.3 billion cap on the cost of ECO, amid fears that suppliers will be blamed for rising bills when the scheme comes into force.

Energy UK, the industry group representing the Big Six suppliers, has commissioned an independent report into the issue, which will be presented to the Prime Minister and Ed Davey, the Energy Secretary, today.

This study by NERA Economic Consulting found the cost of the green charges will be around £2.3 billion – or £95 per household.

But it says this estimate may be too low as there are other risks to the green scheme that could cause the real cost to “exceed” this figure.

The report, due to be published on Monday, will say "unreliable" calculations by the Department of Energy and Climate Change have led it to underestimate the charges.

The NERA economists will also conclude that the ECO system is an “expensive” way of helping poorer households bring down their energy bills.

Last night, a spokesman for the Department of Energy and Climate Change said: “ECO replaces existing energy efficiency schemes almost pound for pound, so there will be no additional costs on bills.

“New powers under the Energy Act 2011 will allow us to require energy companies to provide regular information on the actual costs of delivery and how these are passed through to consumers. For the first time we will know if energy companies are simply passing through actual costs or looking to increase their profits by charging consumers more than is necessary.

"We will keep the impact on consumer bills under constant review throughout the lifetime of the scheme.”

The Committee on Climate Change (CCC) has found that the rising gas price is the biggest cause of higher bills for energy customers, adding around £290 to the average annual bill between 2004 and 2010.

Green charges have contributed around £75, including £30 to support investment in low-carbon power generation, and £45 for funding energy efficiency improvements in homes.

However, the effect of environmental policies on bills is likely to get bigger over the next decade as bill-payers will have to partially subsidise new wind farms and nuclear power stations. The CCC believes environmental policies will raise bills by around £110 a year by 2020.

Ed Davey, the Energy Secretary, says this will be cheaper for households in the long run as too much reliance on gas power stations will leave the UK exposed to the rising price of fossil fuels.

He told MPs on the Energy Committee this week that most experts believe gas prices will "stay high or go higher".